Hilsenrath Analysis: Job Report Alone Unlikely to Alter Fed’s Course

Friday’s disappointing and slightly perplexing jobs report is likely to curb the Federal Reserve‘s recent enthusiasm about the U.S. economic recovery, but it seems unlikely to convince officials to alter the course Fed Chairman Ben Bernanke laid out for the central bank in December. That envisioned gradual reductions of its monthly bond-buying program this year.

The Federal Reserve building in Washington.

Bloomberg News

The Fed’s policy committee next meets January 28-29. The decision at hand will be whether to reduce the monthly bond buys from $75 billion in January to $65 billion until officials next meet in March. Mr. Bernanke strongly suggested at his December press conference that the Fed’s inclination is to reduce the purchases by $10 billion increments at every meeting. One weak jobs report–possibly reflecting weather effects, after several weeks of stronger-than-expected economic data on trade and consumer spending and in the face of surprising declines in the unemployment rate–probably won’t alter that calculation.

These were Mr. Bernanke’s words at his December news conference: “If the incoming data broadly support the Committee’s outlook for employment and inflation, we will likely reduce the pace of securities purchases in further measured steps at future meetings. Of course, continued progress is by no means certain. Consequently, future adjustments to the pace of asset purchases will be deliberate and dependent on incoming information.”

The Fed is an inertial institution. Officials spent months coming to the decision they made in December. They’re likely not inclined to change their stance after a report that showed employment growth slowed in December. But as Mr. Bernanke made clear, they could change their stance later if evidence mounts that the economy–once again–isn’t measuring up.

That said, Friday’s report should put to rest for the time being any notion that the Fed will reduce the bond-buying program more quickly than planned.

Officials have been sounding upbeat on the economy lately.

“I’ve been pretty struck by the upbeat tone [in economic data] the past two months,” San Francisco Fed President John Williams said in an interview with The Wall Street Journal earlier this week. Fed Vice Chairwoman Janet Yellen, who will become Fed chairwoman Feb. 1, told Time Magazine she’s expecting around 3% economic growth this year.

The report is a reminder to officials, as if they needed one, not to get ahead of themselves.

“Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend,” Richmond Fed president Jeffrey Lacker said Friday morning.

The report also exacerbates a conundrum for officials.

The jobless rate, at 6.7% at year-end, is falling in large part because people are leaving the labor force. Because it is being driven by unusual labor force flows–aging workers retiring, the lure of government disability payments, discouraged workers and other factors–the jobless rate is a perplexing indicator of job market slack and vigor. Yet Fed officials have tied their fortunes to this mast.

The Fed has said it won’t consider raising short-term interest rates from near zero until the jobless rate gets to 6.5%. Most officials didn’t expect that threshold to be crossed until the second half of this year. At the current rate, unemployment could be there by February. This creates uncertainty about when Fed rate increases will start. They aren’t coming any time soon, but it’s getting harder to say when they will happen or what will drive the Fed’s decision.

In December, the Fed said it would keep rates near zero “well past” the point when the jobless rate hits 6.5%. Now the public will have these questions to consider in the months ahead: What does the Fed mean by “well past?” Is that a year? A few months? How does it relate to the wind-down of the bond-buying program? What does it depend upon? Why is inflation so low when unemployment is falling so fast?

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